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Using an RRSP as a Mortgage Lender

This blog post deals with using an RRSP as a mortgage lender. With interest rates on conventional bank deposits very low, using your RRSP to lend money on a mortgage to a third party or even yourself can be a way of getting a better investment return. Your RRSP has to a self directed one, and your RRSP administrator has to be able to handle mortgages in your RRSP. As well the applicable regulations have to be followed.

You can be your own mortgage lender. If you have enough cash in your RRSP, your RRSP could lend you the money on a first mortgage and your monthly payments could then be made to your RRSP instead of the bank. In such a case the mortgage has to be insured through CMHC or another mortgage insurer. If you don’t have enough money in your RRSP for the entire mortgage you might want to approach a friend who has money in their RRSP or even your bank to do a joint first mortgage with you, i.e. they lend part of the money and your RRSP lends the rest. Many years ago my wife and I did that with our bank. Of course there has to be appropriate mortgage administration agreement between the parties which deals with the ownership of the mortgage, how the payments are divided, etc. It is important to remember that even though you are your own lender, the mortgage administrator will treat it as an arm’s length mortgage. That means you can’t default just because it is your own money. The administrator is legally obligated to enforce the mortgage.

You can also have your RRSP lend on a second mortgage. The rules are less stringent as the mortgage does not have to be insured. I have a client who has done that on a few occasions and is getting a 12- 18% return on his money. Again you have to check the permissible investments under your self-directed RRSP as well as any applicable charges from your administrator.

Many notaries’ and lawyers’ offices will be closed over the holidays so make sure that your client’s notary or lawyer will be open to handle their deal. I will be around throughout the holidays.